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The more I deal with
people, the more confused I become. My confusion can best be summed up in the
following lines from a book written by Robert Pirsig,
back in the early 70's, entitled Zen and the Art of Motorcycle Maintenance. There
is a line in the book that goes like this: 'I was searching for the truth,
and the truth came knocking on the door, and I shout "go away, I'm
searching for the truth!"' Puzzling behavior
to say the least. My confusion reached a crescendo two weeks ago, shortly
after I sent out a report on gold whereby I declared that the mini-correction
had ended and we would go higher. Of course that was not the opinion de jour
and most sane individuals were convinced that we were in the midst of
"the correction." The day after I sent the report out we rallied
+/- $14.00 in a day and then promptly gave it almost all back the next day. The
usual flood of e-mails came in, but one in particular caught my attention. In
it the client stated that gold was "crashing" and wanted to know
what to do. In my own inimitable way, I immediately responded with a short,
direct e-mail of my own which said to "Do nothing." Well, I could
feel the lack of love all the way from my client's office in New York City
back to my perch here on the beach in Pisco, Peru. Right
about then, I'm sure he thought I'd been chewing on some coca leaves and he
would be better served looking for financial advise
somewhere closer to home.
Cute story, but what's the
point? The point has nothing to do with the fact that I was right about gold
(so far) or that I failed to supply the appropriate information to a client
who was obviously suffering some financial distress (because I didn't). The
point has to do with what I would call unreal expectations fueled by just enough knowledge to be dangerous. The fact
that this particular client could tell me that gold was "crashing"
displays a complete misunderstanding of how markets work. It also tells me
that my client expects way too much way too soon. And if it were just one
client, that would be okay, but it's not. It's just about all of my clients
who suffer from this malady, and I find that tragic to say the least. Let's
just focus on the use (or dare I say misuse) of the word crash for a minute. Here
we were with a closing price that was forty cents above the closing price
from two days earlier, and yet we had "crashed." By its very
nature, a crash is an event that implies blood in the streets and that only
occurs once every generation or two. The year 1929 comes to mind. The year
1987 does not, at least not as far as I am concerned. They just don't come
around that often. People threw themselves out of windows in 1929! I am not
aware that anyone on Wall Street did any such thing two weeks ago (I'm being
facetious, I know).
So what's the problem?
Well as I mentioned above, I think it has a lot to do with unreal
expectations that have roots that reach back to the mid-1990's.
For the most part, you could throw money at just about any tech stock and
expect to make a small fortune. [I can draw certain parallels with what is
currently going on with most junior gold stocks right now but I'll save that
for another time.] No value and no thought required! Remember the "Money
Girl", Maria Bartiromo, on CNBC? Concepts like
that were designed to feed the masses. Day traders are a direct result of
such a combination and the Internet makes it easy for them. Most people
confuse the idea of listening to CNBC with the concept of "due
diligence". Unfortunately, that's just not the case. Most 'news' is just
another form of advertisement as Edward R. Morrow has long since left the
building. Real due diligence requires visits to the mines, interviews with
everyone from the company President to the janitor, independent auditors, and
a host of other things that the average speculator, and most analysts, can't
quite grasp. That's what you do when you speculate with your own, or any one
else's money, in any particular stock. All this hard work is what allows you
to sit tight through those ugly corrections instead of hanging yourself from
the nearest rafter.
The rest of the problem
has to do with me… 99.9% of the time I could just care less about
today, or even tomorrow for that matter. What about the other .01% of the
time you may ask? I'm observing possible warning signals that don't come
about very often. Right about now, it should be mentioned that I've gone to
great pains to tailor my life and my work to fit in with the type of person I
am. I will greatly simplify things by saying that I am fifty-one years old, a
loner, very disciplined, and stubborn as hell. Personalities don't come much
more 'closed' than I am. What's more, I like it that way. I keep my own
counsel. I always have, and I always will. In the great spectrum that's
called humanity, you have two extremes: on the one end you have the
"bulldozer" that wants to uncover everything in site, slow and
methodical, while on the other end you have the laser beam. He or she expands
tremendous amounts of energy in order to illuminate a single point. That's
me, and I probably go beyond the extreme if that's possible. And I tailor my
market philosophy and analysis to fit in with my charming personality.
It will probably surprise
you to know that I spend less than an hour a day watching the actual market. I
spend three hours a day gathering data and articles regarding the market, and
I spend countless hours digesting it all. Especially the data! Markets are
forward looking instruments and the numbers are the language of the market. If
you can understand that language, you'll know what is going to happen six
months or a year from now, and that gives you one hell of an edge. And that's
what it's all about, gaining an edge, and that edge is the difference between
failure and success. Better yet, it's the difference between bankruptcy and
real wealth. I do not use my analysis to further a Bull or Bear side when it
comes to an investment; rather I use it to further the right side. It makes
absolutely no difference to me what so ever if gold is in a Bull or Bear
market so long as I am on the right side of the trade.
With very few exceptions,
everything I do is geared to the long run, and I measure the long run in
terms of years. Always! I'm sure I must have been Japanese in some previous
life. The fact that gold went up or down $14.00 in a day, or even why it did
so, is almost worthless knowledge to me. The why of market movements is
unimportant and should be left to the history books. What's truly important
is where the price of gold will be in the year 2010. If I know that, and I
believe I do, then who cares what happens today. You take your position, you
place your bet, and you sit tight! I can't over emphasize these two little
words enough. The only way to take full advantage of any Bull or Bear market
is to sit through it every step of the way. That's how you maximize profits!
Not by trying to pick secondary, or even tertiary, tops and bottoms. The
latter is a recipe for poverty.
In conclusion, I think day
traders are at a real disadvantage and this has a lot to do with technology,
the very thing that gave them access to the markets in the first place. I
liken the Internet to the Bucket Shops found throughout the US in the
very early 1900's. They were brokers who never bought nor sold stocks, but
pretended to for unsuspecting clients. They offered razor thin margins
designed to enticed even the smallest client to
invest in stocks. Own a hundred shares of GE for just a few dollars! Then
they cleaned them out before they ever knew what hit them. That's precisely
what the Internet does to even the smartest traders; it sets them up like
bowling pins with promises or untold wealth, and then takes great pride in
mowing them down.
Market Commentary
DJIA - The highlight of
the day, at least as far as the stock market is concerned, has to be the fact
that the DJIA finally broke out to new highs and confirmed the recent highs
in the Transportation Index. Earnings seem to be disappointing, Iraq isn't
going well, the economy appears to be slowing, Iran just won't tow the line,
volatility is quite low, and stocks are priced to perfection with an average
PER of 19 and yet all systems are go. What is an average investor to do under
such circumstances? Well, the average investor is going with the flow and
jumping on board. And if you stop to think about it, that makes perfect
sense. In a world absolutely flooded by liquidity (and debt), it is only
reasonable to think that part of that liquidity will find its way into the
stock market irregardless of whether there is an
absence of value or not. I have felt for some time that the market would not
turn down until it had sucked out the very last cent form the very last widow
and/or orphan left out there. A recent headline stated that investors are
flocking to the stock market in record numbers so it looks like the process
has begun.
What is an investor to do?
First off, you must recognize the moment for what it is, i.e., the final
blow-off to the upside before the market turns down and leaves everyone
wondering just what happened to all their hard-earned money. Three weeks ago,
I advised my clients to seize the moment and go long the JUNE DJIA. At that
point in time, it was trading in the 10,850 range. The June DJIA futures
contract closed out the month of February at 11,025. I am looking for a top
of 11,335 and maybe just a bit higher. My plan is to exit at 11,300 and I am
looking for that to happen within the next month or so. Until that time, I am
long the DJIA and will stay that way. I would only exit on a close below
10,832.
US Dollar - The March US$
futures contract ended the month of February at 90.08 and really not much
different then where it began four weeks earlier. Some interesting things
have happened during the course of the month though. It appears that the
rally that began around January 23rd finally gave up the ghost and, in doing
so, recorded our third consecutive lower high at 90.94. A look at the Weekly
Chart of the US Dollar Index shows the series of lower highs:
It also gives the
impression of having just completed the second shoulder in an almost picture
perfect head and shoulders top. The neckline in such a top would come in just
above the 50-w.m.a. at +/- 88.55.
It is worth noting that
both the RSI as well as the MACD did not confirm the higher high registered
in October of last year and makes it difficult to see a continuation of the
move up. Also, the 50-w.m.a. is trading well below the 200-w.m.a. leaving there
is no doubt that the dollar remains in a protracted Bear Market decline. The
recent secondary reaction ended at the first level of resistance, at 92.20,
and never even attempted to test significant resistance at the higher 96.00
level. Given the fact that the dollar is still somewhat overbought on the
weekly chart, I have to believe that the secondary reaction is now over and
we will slowly head down to test support at the 50-w.m.a. and then eventually
at 86.76. This latter number represents a 50% retracement
form the Bear Market low posted in December 2004 on up to the October 2005
high. It is an important number, and it will require a lot of work, but I am
convinced we will trade below it below the year is over.
In my opinion, the dollar
is finding support from an unlikely ally, the Federal Reserve. The Fed is
being forced to raise interest rates to a higher level than most would have
anticipated, to a minimum of 5%, and that is lending support to the dollar. Eventually,
you can drop it from helicopters but if no one wants it, it really won't
matter. We are not any where near that extreme yet, and we may never get
there, but it is a Bear Market and the dollar is going lower over time. Therefore,
my recommendation remains the same as it's been for months: I am short the
dollar and long the Swiss Franc and I will stay that way.
Gold, Silver & Related
Stocks - I like to save the best for last. I would like to begin this report
with a paragraph from my February 8th article on gold entitled Has The Fat
Lady Sung?:
With that being said, I
want to talk about yesterday, and today, and even tomorrow because there is a
plethora of less than holy people calling a top for probably the fifth time
in the last month and a half. The first top was called back on December 12th
when we hit an intraday high of 545.00 and then fell to 493.00 seven days
later. My clients used that "top" to add on. There have been other
tops as well, but you get the idea. Now what we are seeing is a
self-fulfilling prophesy of resistance at 569.75, but we have not yet seen
the top. Better yet, this is not the correction that everyone has been
waiting for. What this is, in my opinion, is nothing more than a three to
seven day move down which should be followed by some sort of short
consolidation, and then a resumption of the leg up. This counter trend move
down may find support at 553.25, but more than likely will test 539.50 or
even 527.00, forcing all the speculative weak longs out at just the wrong
time.
It just so happens that
this is precisely what has happened. We tested 539.50 (in the March 06 Gold
contract) and held it on a closing basis. There was a retest a couple of days
later and that retest has been followed by consolidation and a gradual
increase in price. The April Gold futures contract closed out the month of
February at 563.90 and will test the spot price resistance of 569.75 sooner
or later. I have absolutely no doubt of that.
What I want to do now is
modify my forecasts for the rest of this move. This is really important, so
pay attention. I have felt for some months that we would test 569.75 a number of times
and, at best, make a marginally higher high. This would then be followed by a
correction. I now no longer believe that to be the case. I am
looking for a
quick move up to short term targets of 603.00 and 644.00. At or close to
633.00, I expect a correction of no more than 5%. This correction will then
be followed by another relatively fast move to +/- 678.00 where another 5%
correction will be possible. My eventual price target is now 728.62 in the spot
price and I do not expect to see any meaningful corrections
until that price is hit. Once the price target of 728.62 is touched, I
expect to see our first really significant correction of this Bull Market
campaign. That correction should be somewhere in the neighborhood
of 25% and will bring us right back down to the 550.00 level.
With all of this being
said, I will not try to time any of the corrections, but I will add on once I
have seen two consecutive closes above the 569.75 mark. What will I do if and
when I believe the 25% correction is under way? I really don't know but I
suspect I will do the same thing I've done since 2001, i.e., sit through it
with my positions intact. Why? I don't have any guarantee that it will reach
25% and I don't want to take a chance and find myself out of the Bull Market.
Just ask all of those who sold out their positions back on February 10th,
expecting a "correction," what that is like. In short, I am long
gold and will stay that way.
With respect to gold
stocks, I continue to be long BVN, CDE, GG, GLG, NEM, and RGLD. I used recent
weakness to add on to BVN at the 25.75 area knowing that the concerns for the
Peruvian elections had been overdone. Likewise, I will use concerns about NEM's balance sheet to add on to that stock today or
tomorrow. Gold stocks, much like silver at this point in time, will follow
the price of gold for a while. With respect to silver, I will add on to my
current positions once I see two consecutive closes above 10.00.
Enrico Orlandini
Website : Dow Theory Analysis
Dow Theory Analysis S.A.C.
Lima, Peru
Phone:
001-51-56-973-5599
Email: ebo@dowtheoryanalysis.com
For those of you interested in receiving
information on the Funds we manage, please feel free to e-mail us at ebo@dowtheoryanalysis.com and we will respond as soon as possible.
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